• Short-term outlook on corporate loan growth is weakening… Egypt banks (under our coverage) saw strong loan growth of 22% in 2015, up from 18% in 2014. However lending demand in the corporate segment has seen a slowdown in the past few months, and the banks we met in Egypt are not particularly upbeat on the outlook for loan growth in the short-term for as long as it continues to be difficult for Egypt corporates to source USD. Furthermore, the recently imposed tariffs on several consumer goods will lead to a slowdown in imports and economic activity. In the current environment, we favour CIB and CAE, which have in our view the best risk/reward profile (ROE of 30% and 27%, respectively in 2016e)
• ... and retail loan growth is also set to decelerate on new DBR limits The CBE introduced for the first time a ceiling on debt burden ratios for retail borrowers capped at 35% of the net monthly salary. The CBE is using this limit to establish healthier lending practices by banks and also to constrain imports. We understand from our meetings that going above the 35% DBR limit was an extended practice by Egypt banks as the ultimate default risk is mitigated by banks requiring cash deposits against consumer borrowing (mainly credit cards). We are likely to see a slowdown in retail lending growth across the sector, but the slowdown might be more pronounced for ADIB Egypt, HDB and to a lesser extent Credit Agricole, which have grown retail loans at a solid pace in the past two years and have above average exposure to the retail segment.
• 20% of loan book in SMEs by 2020 seen as a challenging target CBE’s instruction for banks to have 20% of loans in SMEs (turnover of up to EGP100 million) by 2020 from c5% on average currently, is seen as a challenging target, not only because of the typically small tickets of SME loans but also because a large number of SMEs are part of the informal economy. SME is a key strategic sector, and banks will be relaunching their offering, but we understand this might take time as many banks in Egypt continue to have a strong corporate culture. While the cost of risk associated with SMEs is higher, banks see the overall return of SMEs as attractive because of high lending rates.
• NPL inflows fairly contained; NIMs likely to be broadly stable Private sector banks’ exposure to the tourism sector is small, and this is typically a segment where public sector banks have a greater involvement. Credit quality deterioration has been fairly contained so far, but banks have highlighted corporates which rely on bank support to access FX as a potential area of concern. Banks expect stable NIMs in 2016, but have highlighted risks to NIMs from potential pressure on lending yields as pricing competition for EGP loans increases and as banks as reluctant to lend in USD.

Elena Sanchez-Cabezudo, CFA
Rajae Aadel